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Parental controls: Anti-corruption compliance programs for joint ventures, subsidiaries and franchisees (Part 7)

In this seventh of an eight-part series on “parental controls,” we continue our discussion from the prior post on controls extended to more actively managed subsidiaries. We also tackle franchise compliance.

(You can read Parts One, Two, Three, Four, Five and Six of this Series here.)

Parent companies often provide web-based compliance and ethics (C&E) training to their subsidiary companies, which can be a cost-effective way to provide it throughout an organization.

Subsidiaries often then supplement web-based C&E training with in-person or other types of training, in particular to cover or emphasize those risk areas of greater significance to the subsidiary.   

With respect to C&E communications other than formal training, it can be helpful to have messages of support for the C&E program from both the parent and subsidiary leadership.

C&E auditing is typically conducted by parent companies, although subsidiary C&E staff may supplement the parent company’s audit work with their own audits. 

In addition, in some companies, C&E staff from various subsidiaries may perform C&E audits or assessments of their sibling companies, which can be an excellent use of resources and a good opportunity for practice-sharing.

Parent companies often run helplines, although organizations should consider creating subsidiary-specific reporting options as well, in particular encouraging employees to report issues to specific individuals at the relevant subsidiaries. 

Although parent companies -– by running helplines -– receive at least some subsidiary reports of misconduct in the first instance, they typically refer most matters back to the subsidiaries for investigation. 

Some matters can and should may stay at the parent company for investigation, however, such as investigations involving high-level leaders of subsidiaries or the most serious allegations.

Finally, we are not aware of any cases brought against a franchisor based on a franchisee’s corrupt actions, but the case for the former promoting compliance by the latter may still be strong depending on:

  • The degree of control by the franchisor, with “direct unit” franchises tending to suggest the need for greater compliance measures.
  • The degree of contact between franchisor and franchisee.
  • The corruption and other legal risks for franchisees depending on, among other things, the nature of business, geographical consideration, and how it uses third parties.

The steps taken in a franchise compliance program tend to be similar to (albeit lighter than) that of a joint venture or subsidiary (discussed in prior posts).

At a minimum, the following should be generally be considered in all franchise compliance programs: anti-corruption related vetting, anti-corruption warranties, audit/monitoring rights, escalation requirements, and periodic reminders of the franchisor’s anti-corruption program, including at franchisee meetings.

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Jeffrey M. Kaplan and Rebecca Walker are partners in Kaplan & Walker LLP.

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